Malawi looks to punitive tax regime for budget deficit

Malawi Government is looking towards implementing punitive tax measures in a bid to close the 2014/2015 huge budget deficit gaps emanating from the decision by its partners not to support the national fiscal plan.

Following the aid drought which will result in certain sectors suffering during the implementation of the budget, government plans to broaden tax base by, among other things, hiking user fees, fines and levies collected by government ministries and departments.

The development means that Malawians should brace for tough times ahead.

Recently the country’s Minister of Finance, Economic Planning and Development Goodall Gondwe announced that the 2014/2015 budget is expected to be pegged at K743 Billion (US$1 790 361 446) but admitted that the budget is likely to face challenges in several sectors due to a likely huge deficit.

Gondwe:  Punitive tax measurers

Gondwe: Punitive tax measurers

Gondwe disclosed that the Malawi Government was having a myriad of trouble to come up with the national budget due to the suspension of aid by some of the country’s partners.

Secretary to the Treasury (ST) Newby Kumwembe said in an interview that as a means of closing the deficit gap the focus of tax and non-tax policy reforms in the 2014/15 budget will be to broaden the tax base, encourage domestic production through the promotion of value addition, encourage investment and exports through various tax policy instruments while enhancing revenue yield.

“Government intends to review some of the user fees, fine and levies by government ministries and departments to ensure that prices of government services reflect the cost providing those services,” said Kumwembe.

Major donors are tenaciously gripping to their budget support to Malawi resulting into government facing a huge fiscal gap as resource envelop falls significantly short of the planned expenditures.

Malawi needs adequate domestic revenue to finance critical expenditure on social services such as health and education and narrow the budget deficit—a situation when government spending is greater than tax revenues—in the process.

“In addition, government will undertake revenue administration reforms with a view to improve efficiency in revenue collection,” added Kumwembe.

In the 2013/14 budget, government increased the zero percent threshold for pay as you earn (Paye) from K15 000 (about $40) to K 20 000 (about $50) and the next K5 000 (about $13) taxed at 15 percent whilst the excess is taxed at 30 percent.

Economic commentators have argued that the prevailing tax free band is still not matching the cost of living, biting most average and low income earners.

Kumwmbe said in order to adequately finance the 2014/15 budget, government will leverage the use of technology to enhance efficiency in tax and customs collection and administration without raising associated rates.

He cited initiatives that have been introduced such as the use of Electronic Fiscal Devices (EFD’s) for value added tax (VAT) accounting which he said will reduce tax evasion.

“Let me mention here that over the years, the main challenges in VAT administration have been tax evasion through non-issuance of tax invoices. The EFD’s will curb this malpractice,” he added.

Kumwembe said government is also aware that some operators in the private sector have reservations over the same introduction of EFD’s, but assured that the implementation of the initiative is being monitored closely.

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